Forgiveable Payroll Loans for Small Businesses

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was passed by the U.S. House of Representatives on the same day and by the U.S. Senate two days prior. Certain provisions of the CARES Act become effective retroactive to earlier dates, but most of the newly enacted laws under the CARES Act become effective on the date of enactment- March 27, 2020.

One of the provisions of the CARES Act is the Paycheck Protection Program (“PPP”), which provides certain business access to certain loans to pay certain expenses due to hardships faced by the COVID-19 outbreak and related disruptions. This memorandum provides a summary of the PPP. Assuming it is signed into law as written, further guidance should follow in the form of Federal regulations.

  • PPP loans are generally available to employers with 500 or fewer employees.
    • Employees of affiliates of the borrower may be included in determining the total number of employees.
  • PPP loans will be made by lenders who are currently approved to make loans under Section 7(a) of the Small Business Act (“7(a)”) or who are otherwise approved by the Small Business Administration (“SBA”) and the Treasury Department to become PPP lenders.
    • This is not direct loan from the SBA to borrowers.
    • Therefore, Borrowers should first contact their regular bank (assuming the bank is an approved 7(a) lender or otherwise approved by the SBA or Treasury Department).
  • PPP lenders are delegated authority to make and approve PPP loans, with no additional SBA approval required. PPP lenders are only required to consider whether an applicant was in operation on February 15, 2020, and either had employees for whom it paid salaries and payroll taxes or paid independent contractors.
  • Unlike with other 7(a) loans, applicants are not required to show that credit is unavailable elsewhere or demonstrate repayment ability.
  • Borrowers must make certain certifications when applying for a PPP loan, including:
    • That “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations” of the borrower; and
    • That “funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments”. (More on this below.)
  • PPP loans are backed by a 100% guaranty from the SBA.
  • Borrowers can use the borrowed funds for a variety of qualified costs related to employee compensation and benefits, including (1) payroll costs, (2) continuation of health care benefits, (3) employee compensation (of those paid less than $100,000 over the prior year), (4) mortgage interest obligations, (5) rent, (6) utilities and (7) interest on debt incurred before February 15, 2020.
    • The funds must be actually used during the “covered period”, which is February 15, 2020 through June 30, 2020.
  • The maximum PPP loan available to any business is the lesser of (a) 2.5 times the average monthly payroll costs of the business over the year prior to the making of the loan, or (b) $10 million.
  • PPP loans bear interest at a maximum rate of 4% and mature no later than 10 years after determination of the amount, if any, to be forgiven (discussed below).
  • Payments under PPP loans (and all other 7(a) loans) will be deferred for 6–12 months.
    • The specific terms of deferral are not yet known, but the SBA is directed by the CARES Act to issue guidance on this issue.
  • PPP loans have no collateral or personal-guarantee requirements (unlike other 7(a) loans). There will be no recourse to owners of borrowers for nonpayment, except to the extent proceeds are used for an unauthorized purpose.
  • For PPP loans, prepayment penalties, the guaranty fee, and annual fee, which are all applicable to other 7(a) loans, have been waived.
  • Forgiveness:
    • PPP loans can be forgiven to the extent that the loan proceeds are used for the following costs incurred and payments made during the eight-week period after the loan is made:
      • Payroll costs (except for those employees making more than $100,000);
      • Group healthcare benefit costs and insurance premiums;
      • Mortgage interest (but not prepayments or principal payments) and rent payments on mortgages and leases in existence before February 15, 2020;
      • Certain utilities, including electricity, gas, water, transportation, and phone and Internet access for service that began before February 15, 2020; and
      • Additional wages paid to tipped employees.
    • However, the amount forgiven is reduced based on failure to maintain the average number of full-time equivalent employees versus the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as selected by the borrower.
      • This is intended to incentivize borrowers to not make layoffs.
    • The amount forgiven is also reduced to the extent that compensation for any individual making less than $100,000 per year is reduced by more than 25% measured against the most recent full quarter.
      • This is intended to incentivize borrowers to not cut compensation.
    • Reductions in the number of employees or compensation occurring between February 15, 2020 and 30 days after enactment of the CARES Act will generally be ignored to the extent reversed (i.e., employees re-hired or compensation restored) by June 30, 2020.
    • Forgiven amounts will not constitute cancellation of indebtedness income for Federal income tax purposes.
  • Under separate Federal law, Economic Injury Disaster Loans are also currently available from the SBA right now (these are loans made directly by the SBA). Borrowers who take out disaster loans can also take PPP loans to the extent that the disaster loan is used for purposes other than those permitted for PPP Loans.
  • Disaster loans may be refinanced with proceeds of PPP loans, in which case the maximum available PPP loan amount is increased by the amount of disaster loans being refinanced.

Source: Dublin OH Attorneys Carlile Patchen & Murphy LLP email dated 3/27